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Saunders Family Ventures LLC v. Domestic Natural Resources LLC

United States District Court, N.D. Texas, Dallas Division

January 11, 2017

SAUNDERS FAMILY VENTURES, LLC, et al., Plaintiffs-counterdefendants,



         In this action alleging federal and Texas securities fraud and related claims arising out of an oil-drilling joint venture, defendants move for summary judgment and one plaintiff moves for partial summary judgment. For the reasons that follow, the court grants defendants' motion in part and denies it in part, and it denies the plaintiff's motion for partial summary judgment.


         This lawsuit is brought by plaintiffs-counterdefendants Saunders Family Ventures, LLC (“Saunders”), Monticello Capital Partners, LLC (“Monticello”), and Samuel J. Snead, Jr. (“Snead”) against defendant-counterplaintiff Domestic Natural Resources, LLC (“Domestic”) and defendants Richard Oliveri (“Oliveri”), Erick Boyle (“Erick”), Ryan Boyle (“Ryan”), and Brice LeBlanc (“LeBlanc”).[1] It arises from investments that plaintiffs made in the Jordan Celeste Prospect #1 (“JCP#1”), a joint venture in Kent County, Texas.[2]Domestic is the managing venturer of JCP#1, and Oliveri, Erick, Ryan, and LeBlanc were managers or employees of Domestic. Between late 2013 and late 2014, defendants solicited investments from plaintiffs to develop the JCP#1 into a full oil-drilling operation. Plaintiffs received marketing materials, including a detailed confidential information memorandum (“Confidential Memorandum”), that laid out the parameters of the venture. The Confidential Memorandum noted that the JCP#1 was divided into 35 units sold at $44, 700 per unit. Each unit entitled the holder to a 2.82% working interest and a 1.28% net revenue interest (“NRI”) in JCP#1. After receiving the Confidential Memorandum, plaintiffs signed a venture agreement (“Venture Agreement”) with Domestic to govern the relationship. Each plaintiff invested separately in the venture and only later discovered the identities of the others.

         Plaintiffs allege that the entire venture-from solicitation to execution-“was riddled with fraud[.]” Ps. Br. 16. Snead contends that he was first brought into the venture by Bill Steinmetz (“Steinmetz”), who Snead alleges portrayed himself as someone who had already invested in JCP#1. Snead initially invested $100, 000 for 2.73 units in JCP#1, corresponding to an NRI of 3.5%. After Snead made his investment, Domestic continued to solicit him to make a larger investment that would grant him a higher tier of ownership. Snead agreed to invest the additional sum of $200, 000 in exchange for “20% of the total gross processed”[3]from the JCP#1. Snead App. 84. Snead believed that this entitled him to a payout calculated as 20% of all proceeds from the well, to be determined before other investors' interests were calculated.

         After Snead made this additional investment, defendants sent him a letter that incorrectly stated his interest in the JCP#1. Snead called defendants to request an explanation, and he alleges they never responded. Domestic also sent Snead various documents, including a June 1, 2015 Certificate of Ownership, that stated that he had a 15% NRI in the JCP#1. Internal records submitted by defendants show, however, that Snead has the equivalent of a 20% NRI. Domestic contends that the distinction between NRI and total gross processed is immaterial.

         In contrast to Snead, Saunders and Monticello did not invest in a higher tier; they contend that defendants did not disclose that there was an additional tier of investors. Saunders and Monticello invested $60, 000 and $42, 857.14, respectively, and according to the JCP#1's books, they were given larger shares of NRI than under the terms set forth in the Confidential Memorandum.

         According to plaintiffs, various issues arose with the operation of the JCP#1 after they made their initial investments.[4] Domestic decided to use BDI Operating, LLC (“BDI”) as the drilling contractor, who was responsible for the actual operation of the JCP#1 well, and plaintiffs allege that they were not told that Oliveri, Erick, and Ryan are the only managing members of BDI. Defendants contend that they did disclose this to Snead, and, in any event, that this information was readily available through state corporate records. Plaintiffs also allege that defendants solicited additional contributions to drill additional wells based on misrepresentations and forgeries. Defendants deny this accusation.

         Plaintiffs seek to recover from defendants on twelve causes of action alleged in their amended complaint. Domestic has filed a contingent counterclaim against plaintiffs, seeking to recover under the Venture Agreement its attorney's fees, expert witness fees, and all costs of the proceeding, should it prevail in this lawsuit. Snead moves for partial summary judgment on plaintiffs' third cause of action (“count III”) as it pertains to his investment in JCP#1. Defendants move for summary judgment on all 12 of plaintiffs' claims. Both motions are opposed.



         When a summary judgment movant will not have the burden of proof on a claim at trial, it can obtain summary judgment by pointing the court to the absence of evidence on any essential element of the nonmovant's claim. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once it does so, the nonmovant must go beyond his pleadings and designate specific facts demonstrating that there is a genuine issue for trial. See Id. at 324; Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc) (per curiam). An issue is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The nonmovant's failure to produce proof as to any essential element renders all other facts immaterial. See TruGreen Landcare, L.L.C. v. Scott, 512 F.Supp.2d 613, 623 (N.D. Tex. 2007) (Fitzwater, J.). Summary judgment is mandatory where the nonmovant fails to meet this burden. Little, 37 F.3d at 1076.

         To be entitled to summary judgment on a claim or defense for which it will have the burden of proof, a party “must establish ‘beyond peradventure all of the essential elements of the claim or defense.'” Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 878 F.Supp. 943, 962 (N.D. Tex. 1995) (Fitzwater, J.) (quoting Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)). This means that it must demonstrate that there are no genuine and material fact disputes and that it is entitled to summary judgment as a matter of law. See Martin v. Alamo Cmty. Coll. Dist., 353 F.3d 409, 412 (5th Cir. 2003). “The court has noted that the ‘beyond peradventure' standard is ‘heavy.'” Carolina Cas. Ins. Co. v. Sowell, 603 F.Supp.2d 914, 923-24 (N.D. Tex. 2009) (Fitzwater, C.J.) (quoting Cont'l Cas. Co. v. St. Paul Fire & Marine Ins. Co., 2007 WL 2403656, at *10 (N.D. Tex. Aug. 23, 2007) (Fitzwater, J.)).


         The national and local summary judgment rules dictate how a party who opposes summary judgment must cite the summary judgment record. Fed.R.Civ.P. 56(c)(1)(A)

         provides, in relevant part: “A party asserting that a fact . . . is genuinely disputed must support the assertion by: (A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials[.]” Rule 56(c)(3) states, in relevant part: “[t]he court need consider only the cited materials[.]” Rule 56(e) provides:

[i]f a party fails to properly support an assertion of fact or fails to properly address another party's assertion of fact as required by Rule 56(c), the court may: (2) consider the fact undisputed for purposes of the motion; [and] (3) grant summary judgment if the motion and supporting materials-including the facts considered undisputed-show that the movant is entitled to it[.]

And N.D. Tex. Civ. R. 56.5(c) states: “[w]hen citing materials in the record, as required by Fed.R.Civ.P. 56(c)(1)(A) or (B), a party must support each assertion by citing each relevant page of its own or the opposing party's appendix.”

         In sum, “Rule 56 . . . saddles the non-movant with the duty to ‘designate' the specific facts in the record that create genuine issues precluding summary judgment, and does not impose upon the district court a duty to survey the entire record in search of evidence to support a non-movant's opposition.” Arrieta v. Yellow Transp., Inc., 2008 WL 5220569, at *2 n.3 (N.D. Tex. Dec. 12, 2008) (Fitzwater, C.J.) (quoting Jones v. Sheehan, Young & Culp, P.C., 82 F.3d 1334, 1338 (5th Cir. 1996)), aff'd sub nom. Hernandez v. Yellow Transp., Inc., 670 F.3d 644 (5th Cir. 2012). “[T]he court is not obligated to comb the record in search of evidence that will permit a nonmovant to survive summary judgment.” Id. (citing Adams v. Travelers Indem. Co. of Conn., 465 F.3d 156, 164 (5th Cir. 2006)).


         All parties have filed separate statements of facts that they contend are required by rule. The court disagrees. The applicable Federal Rules of Civil Procedure do not require that such statements be filed. This court's local civil rules at one time provided that “[a] motion for summary judgment must list in numerical order: (1) the undisputed facts upon which the motion relies; and (2) the issues of law.” N.D. Tex. Civ. R. 56.1(a) (1997) (amended 1998). And they required that “[a] response to a motion for summary judgment must list in numerical order: (1) the disputed facts upon which the response relies; and (2) the disputed issues of law.” N.D. Tex. Civ. R. 56.1(b) (1997) (amended 1998). But these requirements were abrogated effective April 15, 1998. Since then, the court's local summary judgment rules have limited the summary judgment filings to motions, responses, replies, briefs, and appendixes. The Rules neither require nor permit separate listings of disputed and undisputed issues of fact and law or the filing of pleadings like the parties' statements of fact. Moreover, N.D. Tex. Civ. R. 56.7 provides that “[e]xcept for the motions, responses, replies, briefs, and appendixes required by these rules, a party may not, without the permission of the presiding judge, file supplemental pleadings, briefs, authorities, or evidence.” Accordingly, the court has not considered any arguments contained in the parties' statements of facts.


         The court turns first to the grounds of defendants' motion that are addressed to plaintiffs' first (“count I”) and second (“count II”) causes of action. In count I, plaintiffs allege a claim for fraud in connection with the purchase or sale of securities, in violation of § 10(b) the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. In count II, they allege that Oliveri, Erick, Ryan, and LeBlanc are liable under the federal securities laws as control persons.


         “Section 10(b) and Rule 10b-5 prohibit making any material misstatement or omission in connection with the purchase or sale of any security.” Ludlow v. BP, P.L.C., 800 F.3d 674, 681 (5th Cir. 2015) (quoting Halliburton Co. v. Erica P. John Fund, Inc., __U.S.__, 134 S.Ct. 2398, 2408 (2014) (internal quotation marks omitted)). To recover under § 10(b) and Rule 10b-5, plaintiffs must prove: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” John Fund, 134 S.Ct. at 2407 (citations and internal quotation marks omitted).


         Plaintiffs allege that defendants are liable under § 10(b) and Rule 10b-5 because they made various “untrue statements of material fact and/or omissions [of] material fact upon which Plaintiffs reasonably relied.” Am. Compl. ¶ 203. They assert that various misrepresentations and omissions occurred both before and after they invested in the JCP#1. Although the court is unable to discern from plaintiffs' briefing all of the specific misrepresentations on which they rely, [5] it need not analyze each potential misrepresentation or omission because plaintiffs have failed to submit sufficient evidence to enable a reasonable trier of fact to find that defendants acted with scienter.[6]

         To establish under § 10(b) and Rule 10b-5 that a defendant acted with scienter, the plaintiff must prove that the defendant made a misrepresentation or omission with “an intent to deceive, manipulate, or defraud [or with] severe recklessness[.]” Southland Sec. Corp. v. INS pire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004) (quoting Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir. Apr. 1981) (en banc)) (internal quotation marks omitted). To amount to severe recklessness, a misrepresentation or omission must be “an extreme departure from the standards of ordinary care, ” and must present “a danger of misleading buyers or sellers which is either known to the defendant[s] or is so obvious that the defendant[s] must have been aware of it.” Broad, 642 F.2d at 961-62. “For purposes of determining whether a statement made by [a] corporation was made by it with the requisite Rule 10(b) scienter . . . [the court] look[s] to the state of mind of the individual corporate official or officials who [made, issued, or approved] the statement[.]” Southland, 365 F.3d at 366.

         The only possible evidence of scienter that plaintiffs have submitted is that defendants failed to disclose to Snead that Steinmetz “was really a paid agent of Defendants.” Ps. Br. 9 (the “Steinmetz Misrepresentation”).[7] Plaintiffs point to financial records and communication records as proof that Steinmetz was not a co-investor, as Snead believed. Therefore, according to plaintiffs, Steinmetz misrepresented the investment opportunity and fraudulently induced Snead to invest. Plaintiffs maintain that “[a] rational trier of fact could infer from this evidence that Steinmetz was a shill, posing as an enthusiastic customer to rope in investors. Steinmetz's covert arrangement with the Defendants is evidence that Defendants acted with a mental state embracing an intent to deceive, manipulate, or defraud[.]” Id. Plaintiffs appear to aver that the Steinmetz Misrepresentation is sufficient to meet the scienter requirement for all misrepresentations or omissions associated with their investments in the JCP#1. The court disagrees.

         To establish that the defendant in question is liable under § 10(b) and Rule 10b-5, plaintiffs must prove for each alleged misrepresentation or omission that the defendant acted with scienter. See Wu v. Tang, 2011 WL 145259, at *5 (N.D. Tex. Jan. 14, 2011) (O'Connor, J.) (“Plaintiffs must show the requisite level of scienter for each claim.”); see also Southland, 365 F.3d at 373 (analyzing each alleged misrepresentation individually to determine whether plaintiffs sufficiently pleaded facts to raise strong inference of scienter). At most, plaintiffs have submitted evidence that the Steinmetz Misrepresentation would enable a reasonable trier of fact to find scienter for a misrepresentation of Steinmetz's ...

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